M&A Advisory: assisting, negotiating, leading (part 1)
How many books have been written on negotiation strategies. With comparisons to poker- and chess games. Who reveals which card when, who anticipates more moves, who prevails.
From this opening statement alone it should be apparent, that this kind of mindset does not get us far when discussing the transaction of a non stock exchange quoted company or the investment into a start up. A prenuptial agreement might be more appropriate by way of comparison.
But of course this analogy would be a more difficult sell. We choose to ignore comparisons for now though and begin with the distinction between the negotiable and non negotiable core elements of an M&A transaction.
The arguably most important non negotiable element of most transactions, prerequisite actually, is the personal fit. The question whether the parties, which are bound to communicate and cooperate after the transaction, look foward to it or are at a minimum able to. Ultimately, this shows only later, but the informality, the nonchalance so to speak, hoovering over a meeting room full with representatives of both companies, or not at all, is a good indicator for starters.
For this reason it appears advisable to make parties meet as early as possible in the process (which in addition contributes more to the comprehension of the business case than for ever mailing the most elaborate presentations).
But how far shall the direct exchange go, shouldn’t the momentum be used to directly start negotiating the deal? At the very least drop the conerstones, make or break? And who should take the lead on that?
The cobweb of negotiating topics
As far as the negotiable aspects of the transaction are concerned, I already gave brief insights into the main and subsidiary elements of M&A discussions. In addition the negotiations take place along a time line. There are very good reasons to sign an LOI, which helps to structure the clauses to be negotiated. But since an LOI is for the most part intended to be non binding anyway, experienced negotiating partners may for various motives agree on talking about an SPA or investment agreement right away. But even then it will be difficult to not priotize topics or deal with them in steps.
Therefor most negotiation items have at least two dimensions, for one they become increasingly detailed. Secondly, they are usually negotiated along a time line. Though one may say that nothing is agreed upon until the notary date and everything can be questioned up to the finishing line, this kind of approach really rocks the boat. After all the parties involved in a transaction are supposed to build trust from a start, intending to cooperate with each other for a long time to come.
This in turn means that even issues that are not agreed upon in writing need not to be taken lightly, negotiation points being connected with each other on above mentioned two axis. Actually M&A transactions are much more akin to curling than to javalin throwing. The javelin throw athlete we easily picture. All to himself he gives the javelin direction and energy. The rest is determined by outer circumstances, such as the wind. In the case of curling – if you remember those images from when you still watched winter olympics – quite a bit happens as the curling stone travels and one may say that things regularly become hectic towards the end. Thus the dependency on the initial impuls is high, but the importance to intervene and literally smoothen the trajectory cannot be denied either. A less than perfect comparison, but maybe you get the point.
So this is a first reason why the negotiation strategy, how and what is said in which sequence, should be thought through. The interdependency of issues along a timeline.
Shareholders: United we stand, ideally
Another point that is part of the daily reality of the selling shareholders, the relevance of which is however not apparent from a start. The broader the shareholder team the more diverse usually the characters involved, together with the goals for the company and in a logical extension: the goals of the transaction.
In addition the shareholders, even in smaller companies, don’t have to be involved operationally to the same degree. Understanding motivations and goals of the various share- and stakeholders is part of the list that any buyer or investor goes through. By the same token, the M&A advisor representing the sellling shareholders will be likewise just as interested, early on, to learn about potentially diverging goals to be considered in the course of negotiations.
Maybe no need to wait with this rhetorical question until the end of this article: What do you think: do shareholders achieve overall more, when they speak and negotiate with „one voice“ or independently?
Calm in the storm
Last not least: the psychological element. For most shareholders, financing is a first time and a company sale is a once in a lifetime event. Not surprisingly, experience is an important success criteria for company transactions. Possibly even more important: the necessary serenity. An M&A advisor is of course expected to have been in many similar situations in the past and that the negotiation result will not be as relevant, in monetary terms, to him as to the typical shareholder. This alone contributes to a certain „sangfroid“, which, as we all know, usually means better negotation results. Which is not only true for the supposedly most important topics dealt with at the beginning of discussions, but also for those at the end. They only appear to be secondary, but often have the potential, as outlined, to influence the overall result.
Before the background of these topics that are only partially related to the experience of the participants in the negotiations, the question, whether the negotiations of a deal shall be to a large degree assigned to the M&A advisor is perhaps understandable. An important party in the process, the lawyer, has not been dealt with as of yet to reduce complexity, but this will be compensated for in a future article.